Marketplace Update: What Are the “3 Major Risks” to School Operators’ Profits?

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From new school development and franchising companies to changes in minimum wage legislation, several marketplace factors can impact the value of an owners’ business and related real estate assets.

The key for any school operator is to not only stay informed on the positive and negative factors impacting the industry but to be proactive in protecting the value of their business and real estate assets.

Currently, there are several positive factors in the U. S. economic picture as nationwide, the economy is growing well and unemployment continues to decline. In Texas alone, the state’s seasonally adjusted unemployment rate set a new record low of 3.4 percent in July. This rate broke the previous record low of 3.5 percent last May, marking July as the lowest the rate has ever been since the series tracking began in 1976.

And in 2019, the early education industry is realizing the highest metrics of asset valuation for school business and related real estate in the history of our industry!

However, for every tailwind propelling school owner’s values forward, there are headwinds that can hinder growth and impact profits, thus drawing down on those values.

“The 10% Canyon”

Over the last 12 to 18 months, many of our clients across the U.S. have experienced modest scale dips (most frequently in the 10% range) in their school enrollment and revenues despite a good local economy. Invariably, this drop — which we refer to as “The 10% Canyon” — is almost always caused by increased competition and changing legislation that affects the industry in the area of higher personnel costs.

In a majority of cases, school owners are not overly alarmed by these less-than-catastrophic drops in enrollment/revenue, as this does not collapse the schools’ earnings (and therefore asset values) to zero.

Most of our clients assume that this typical level of loss in revenue in the 10% range would only result in a 10% negative impact on the owner’s total asset values. However, the real impact of this 10% loss in revenues results in a 25-40% loss in earnings. Unfortunately, because the owner’s asset values are driven specifically by the earnings of the business, the result is what we have begun to call “the 10% Canyon”… The owner’s asset value has fallen over the edge of the cliff!

What are the “3 Major Risks” Bailey Routzong sees in today’s marketplace?

With “The 10% Canyon” in mind, the question then becomes: What are the marketplace risks causing this drop in earnings and revenue?

The following are the “3 Major Risks” our clients are currently experiencing across the U.S.

Local public school districts are converting to offer free or low-cost competitive programs (preschool, kindergarten, and before- or after-school programs) to parents, robbing operators of significant enrollment and revenue.

Rapidly expanding competition from “newly built” centers (national, franchise, and local operators) is resulting in more available spaces than many market areas can fill — thus cannibalizing the area’s existing operators’ enrollments and revenue.

Facing Your Financial Metrics

While school owners impacted by the above marketplace risks can continue operations at lower earnings levels, in terms of their significantly reduced total asset value, they often cannot afford to exit their businesses. Unfortunately, only when considering their potential exit from their business does the typical school owner come face-to-face with the financial metrics that determine their asset values.

This situation becomes catastrophic to most owners’ lifestyle plans should they exit their business because that 10% drop in revenue will translate — based on the many cases we have reviewed — into a 25-40% loss in their business and related real estate asset values. In most cases, this is the majority portion of an owner’s intended retirement fund.

Are you prepared to respond to the marketplace risks that are causing these asset value losses? Contact Bailey Routzong today to schedule a confidential discussion with our team for help and advice on responding to these risks and preserving your asset values.

Plus, stay tuned for our next blog as we break down the first of the “3 Major Risks.”